Banks and their world view contexts

GRI-rapport 2016:2

B a n k M a n a g e m e n t

Banks and their world view contexts

Sten Jönsson

Gothenburg Research Institute

School of Business, Economics and Law at University of Gothenburg

P.O. Box 600

SE-405 30 Göteborg

Tel: +46 (0)31 - 786 54 13

Fax: +46 (0)31 - 786 56 19

E-post: gri@gri.gu.se

ISSN 1400-4801

Layout: Henric Karlsson

University of Gothenburg

1.2. What is a bank anyway? 15

1.3. The changing nature of arbitrage 16

1.4. A quick tour of the world views that set the stage for banking 18

2. Greed, arbitrage, and decency in action 22

2.1. Greed – the original sin! 22

2.2. An overview of wealth and the afterlife during the first centuries AD 24

3. Scholasticism – guiding individuals to proper use of their free will 26 4. The most prominent banks – watched by the scholastics 32

4.1. Medici 32

4.2. Fugger 37

5. Mercantilism – the origins of political economy and, consequently, of

economic policy 42

5.1. The glory and decline of merchant banks 45

6. Neoliberalim started with the Austrian School 59

6.1. Modernism and crumbling empires 59

6.2. The context in which the Austrian school developed 61 6.3. The Vienna circle as the birthplace of neoliberalism 63 6.4. A brief review of some neoliberal activist texts 67

6.5. The practice of neoliberalism – deregulation 75

6.6. A bank under neoliberalism 80

7. Instead of a conclusion 91

7.1. The relevance of worldviews 91

7.2. The issue of the nature of banks 93

7.3. Arbitrage in space and time 95

7.4. Can the corporatist view help? 98

7.5. Recapitulation 100

7.6. With such increasing complexity and contradiction –

what kind of banking do we need for the future? 101

References 104

”First. That these loans should only be made at a very high rate of interest…. Secondly. That at this rate these advances should be made on all good banking securities, and as largely as the public ask for them. The reason is plain. The object is to stay alarm….” (Bagehot, 1873, on how Bank of England should avert a banking crisis)

“Only a crisis – actual or perceived – produces real change. When the crisis occurs the action taken depends on the ideas that are lying around.” (Milton Friedman, University of Chicago, 1982)

“Fairness demands the end of a system that privatises gains but

socialises losses.” (Mark Carney, Bank of England, 2013)

Introduction

The quotes above illustrate how authorities, be it the central bank or other institutions, at different times have stated principles on how the context of banks should be ready to help avert banking crises. Banks need support since they have not done very well at times, or maybe too well in the eyes of context actors.

It is therefore reasonable to assume that banks, throughout history, will pay attention to what arguments best justify their existence and their maintenance of their “good name”. Most banks have long histories of survival in adverse conditions and of surfing on good tides. At the same time the recent crisis has demonstrated that many banks (and government agencies) failed to see what was coming and take appropriate action. In fact my starting assumption in the work on this essay has been that most failures in this crisis can be labelled managerial failures, ethical as well as instrumental. Over time I grew convinced that it is more complicated than that. It is not that bank managers do not make grave mistakes, they certainly do, but it is also that the contexts in which banks have to find their model of survival and prosperity there are also wills and strategies at play. The context is not a passive generator of data to be used for forecasting, it is rather an active player, who, to the extent that it finds it worthwhile to pay any attention to banks, will assert power to make banks employ a “logic of appropriateness”. That concept (the logic of appropriateness) was introduced by March & Olsen (1984, 2009) into organizational discourse in the form of

“new institutionalism” deals with the simple but fundamental question: “What should a person like me do in a situation like this?” That question is not only about “who am I? (a person like me)” but also “what kind of situation is this?”

(the context), and “What actions are possible?”(do). The normative factors at play at a given time and place must be discerned and acted upon for the person in question to do the appropriate thing, not only the person’s self-interest but also socially sanctioned values contained in the dominating ideology. Of course the person can rebel, but this is done better with appropriate knowledge of the values that are celebrated here at this time.

By bringing the influence from the context in view we also bring in the concept of power. We need not dwell on the huge literature on power – the traditional definition; Power is exerted when a person A induces another person, B, to do what B would not otherwise do. If we think about banks as being immersed in a sea of societal and other values while employing a logic of appropriateness, we will want to look upon banks and their action in different times with different dominating world views to discern what values might have played a role (as good arguments for action) at different times. We cannot observe the rendition

1

The author is grateful for constructive critique in the seminars of the Bank Management

program of the GRI. Special thanks to Roy Liff for comment on the final draft and to Henric

Karlsson and Lise-Lotte Walter for their work in editing the manuscript for printing.

of arguments directly, of course, but we can map a sequence of different world views (ideologies) in history and lay out the biographies of selected (prominent) banks in parallel. By such an exercise I hope to see what kind of power the context asserted at the time. This is interesting because now, in the wake of the recent financial crisis, the appropriate level of regulation is at the very centre of the debate. From the assertion by neoliberals, that regulation can only introduce more inefficiency, to socialist views that ownership by the State of system critical banks would further stability. These views and arguments are based in value systems that are largely incompatible – they fail to persuade each other – can history make us any wiser?

Therefore my project is to lay out some of the major ideologies in history and place some prominent banks along the time line to see if anything can be discovered concerning the interaction between banks and their value contexts. I have chosen Scholasticism (around 400 to 1600 AD), Mercantilism (the 1600s), Liberalism (1700 – 1900), Neoliberalism (1900 until today). I could have paid more attention to the apex of state prominence in the form of the welfare state in the West and the socialist states in the East, but since banks played a more modest role then (in this time of maximum regulation) I have saved work and effort by skipping over those periods. I also pay relatively little attention to Liberalism since those days provided an abundance of opportunities for banks (regulation beyond what the Law said was not on the agenda). For banks I have chosen Medici of Florence, Fugger of Augsburg, Baring of London, and Royal Bank of Scotland of Edinburgh. They were among the most prominent of their times, but also went bankrupt (or were dismantled in other ways) as their activities came out of step with what others considered to be appropriate.

Figure 1:

This essay is written against a background belief that banks are important agents

in the building of societies. This is because they the function of (re-)allocation of

financial resources to and from “real” actors in that society. Therefore they need

to be attentive to the values and the appropriate reasons for doing things that

are valid in that society. The allocation function of banks is mainly driven by the

arbitrage opportunities that offer themselves – if there is a profit in transferring money from one place to another, it will be done. Transferring money in time (giving loans) involves the risk of not being paid back (credit loss), which makes judgment of character and property an integral part of banking. This was done on an individual level under the guidance of church pronouncements on what is appropriate. When the pre-modern state was being established during the 1600s, the 30 years’ war being a devastating expression of different princes’ striving to gain control of territory large enough to carry the burden of an expanded state administration, banks had to orient their judgments differently. Now the state was an expression of a more permanent, bureaucratic power that had to be included in all strategies.

Mercantilism, consequently, has come to represent the concern with the flows, in and out of the country, of money and precious metals. Banks and other actors had to make deals with the state for privileges and protection. All in the service of the balance of payment and the maintenance of a strong state.

With modernity came science and technology, which offered almost endless opportunities for investment. Britain, having stayed out of much of the war- making in Europe, could take a giant leap forward on the basis of its dominance at sea and technology. Let the entrepreneurs free! was the slogan presented most persuasively by Adam Smith. Mercantilism was just an expression of organized interests. Now the free choice of strategies to be pursued would make everybody better off. Pareto showed that, if actors in the market are left free to chose, an equilibrium will be reached. An equilibrium that is (“Pareto”) optimal, meaning that no market participant can improve his/her lot. Liberalism provided a golden age for most banks, especially if you were located in London, where deal making on financial matters was easy. With many actors there were markets for many types of financial instruments with capacity to accommodate large projects.

However, the industrial society created by these large projects, also generated differentiation in standards of living. Socialism gained footholds in many communities arguing for different principles of resource allocation and justice.

Liberalism and socialism, left and right, became the value depositories from which debaters found their arguments. Power again came to the forefront as states stumbled into two World Wars as political leaders sought domination to be able to change the world in their utopian direction. Banks had to virtually close down business during the two wars and struggled in the des-organization of society in between them. But neoliberalism, an amalgamation of scientific and social values, articulated its ideas of the free market with state oversight to the extent that it came to dominate the debate from the 1980s and onwards. Banks had to find their ways under the auspices of de-regulation. Many failed in 2008.

So much for the larger picture, but how does it work? How do I connect the larger picture to the details of the world view developments, and the calamities of individual banks? I have chosen the sociological theory “Corporatism”

(e.g., Streeck and Schmitter, 1985) to depict how the centre of gravity of good

arguments for regulation of society move as events are interpreted and acted upon. Such moves provide space for new configurations of values and their related arguments that can be labelled “mercantilism” or “neoliberalism” etc.

Under those labels there is variety in concepts and linkages giving rise to debates on how the world should be understood and dealt with. These debates use words combined into narratives intended to impose the right way of thinking on people. The communication we engage in all the time has organizing effects (Cooren, 2000). A promise is a promise because we interpret it as such under the circumstances it is given. A narrative is a story with a purpose (to reveal a certain value or promote a certain attitude). The authors of biographies of banks have purposes that guide their accounts. Economic historians have methodological training to avoid bias, but total fidelity to what really happened is an illusion that can never be reached. We have to be satisfied with what respected professionals tell us – even if we were present ourselves at the time of the events, we would not understand much! So one should be careful not to draw too extensive conclusions from narratives about the life of banks in relation to the ways of understanding the world dominating the general debate at the time. What we can see is an increasing space for strategic choice and an increasing complexity over time.

Can we understand banks today and for the future with the historical insights that this exercise might give? My answer is probably! We can see that some old values/good arguments remain in our vocabulary today as sediments of the old world views, others have been replaced by new inventions. The “weakness of the will“ (akrasia) of Aristotle is perhaps being replaced by “phishing for phools”

(Akerlof & Shiller, 2015). ”Plus ça change, plus c’est la même chose”. We must never stop searching for a better understanding. That is what justifies this effort.

In most societies the intercourse between individuals, e.g., buyers and sellers, is regulated in texts and conventions as part of the social compact. A fair price has been defined as the price, which men of character (vir constans) can agree on.

This is how it was in Aristotle, Roman Law, and Scholaticism. Vir constans is a person who is not easily intimidated. Part of the definition of a fair price was that the will of either party should not be unduly weakened (akrasia). Akrasia (=weakness of the will) could be caused by threat/fear, ignorance and need, and it should not be exploited to your own advantage. It was, to take an example, seen as taking such advantage of the other’s need if you charged interest when granting a loan for an essential acquisition. Ursury is still a sin in some religions.

But now we refer to “the market” as an impersonal, self-regulating mechanism that produces “fair prices” every day.

Today actors within the finance sector take advantage of the other’s weakness

by, e.g., shorting, - selling something for later delivery at a certain price while

expecting the price to fall so that the delivery can be accomplished by buying for

delivery at a later date when prices have gone down. Predatory finance earns lots

of money by exploiting the weakness of others. That would have been a deadly

sin some 1000 years ago, even if other kinds of “one-up-manship” certainly were

not unknown. How did we get from there to where we are now? In what sense

can this be looked upon as progress?

1. Preliminaries

1.1. Theoretical orientation

The justification for taking this long term view on the relation between banks and their contexts is the suspicion that banks, becoming an evermore important part of society, relate to society discursively. What is right and proper behaviour as the parties engage each other as lender and borrower must be regulated in a set of rules stemming from conceptions of what is required for a person (or organization) to uphold the status as member of society, and what it means to be a person of good character. Changes in these conceptions will occur as society adapts to events, new ideas, or overextension of resources. The need for change will be recorded in texts testifying to current concerns, and in this connection the current practices may be described and justified.

The assumption that banking is a dynamic activity adapting to its significant environment implies that there may be different ways of understanding the world and of legitimizing change. Before embarking on the planned historical journey through a very small part of what might be considered relevant texts we need a tool to help us select what might be relevant. Unavoidably the selection will be biased since it will tend to be based on references in the text under scrutiny, to help steer attention I have chosen to rely on traditional corporatist views as presented by, for example, Streeck & Schmitter (1985). What is of interest here is the values and arguments enshrined in the State, Market, Community conceptions (organized interests have been present all the time (guilds, unions, church) but are assumed to base their arguments in the dimensions of the triangular discursive space:

Figure 2:

State represents a view that society should be regulated on the basis of rules

equally applied (via juris prudence) to all by an unbiased, transparent hierarchy

manned by civil servants promoted on merit. State solves problems by the rule

of law. Stability stems from predictability.

Market represents a view where progress is driven by free competition among creative actors, where rewards go to the successful. Problems are solved by competition. Stability stems from self-regulated market equilibria.

Community represents a view where society is built on spontaneous solidarity (care for the other), respect for the individual, for science and professionalism.

Problems are solved via free debate where the best arguments persuade. Stability is won through best practices.

In any world-view there are ingredients of all three aspects. For example, adherents to the Market view recognize the need for state intervention to reallocate resources to those who are unable to compete (children, the old, sick etc,) and to a minimal state organization (police, army, courts etc). What the triangle can help us with is to provide a map of the weight of the three dimensions, for a given society at a certain time, in the form of a location in that space. It is also possible to visualise how that location can be pushed in different directions by events and ideological debate. A war will generate a need for more regulation and stricter hierarchical discipline. Scientific progress will help promote a more liberal view of individual action.

The impact of arguments based in these dimensions of worldviews will depend on their persuasive power to capture the attention of others (we are thinking of collective sense making here – you persuade others) and change their configuration of values. Given the current configuration, and the situation, this impact may be enhanced if the logic of the argument is appropriate. In scientific discourse we like to embed our arguments in one and only one logic (analytic deduction) and dismiss other logics as irrational. In social situations, on the other hand, where people view events and ideas from different perspectives, we should expect several logics to be at play. The success of an argument depends on its ability to persuade the receivers of the statement (normally the sender will already be persuaded). Here are a few kinds of logic:

Logic of discovery – we “see” something new (things) against a background of what we already know. It is the contrast that makes us notice. A measure that deviates from what is normal, or an alien object that is moved into the foreground, will make/help us see a need for change. Here it is the new fact that has persuasive power.

Logic of justification – we argue our case, when it comes to showing that a solution is “good”, by referring to values that are legitimate in the context where the discourse takes place. Here it is value alignment that makes the argument persuasive.

Logic of ideology – we argue for change in priorities or configuration of value

structures by using rhetorical devices (Burke, 1950/1969) like metaphors (Lakoff &

Johnson, 1980) to “show” (rather than “prove”) the benefits of change. Merton (1949/1968, “strain theory”) argued that the demand for ideology production increases in crisis (complexity and contradiction).

The working hypothesis is that we can see shifts, or, over longer time periods, or rather “drift” in conceptions of current context that will initiate change in the manner banking is conducted. Here the particular context that is constituted by dominating world-views is in focus. Obviously, reading old texts or texts about old texts will not deliver enough detail to pinpoint direct causes of the then current change, but ex post it is possible to discern that a change has taken place.

By the same token it is not possible to prove cause-effect relations. My purpose is to show that there are indications that world-views should be reckoned with when we discuss banking practices (and the effect of theories on such practices).

Before immersing ourselves in the historical records of banks and their contexts it is necessary to say something about banks and their changing nature and also what it is that will drive banks to enter new areas of activity. I believe that it is an extended conception of arbitrage that will help in sensitising us to banks’ adaptive measures to changing contexts.

1.2. What is a bank anyway?

The distinguishing character of banks is the fact that money is the input, the output as well as the measure of success. In “normal” firms something is produced (e.g., horse shoes, or consulting services) and offered to clients, who pay money in return. Then the difference between inflow and outflow of money is a good measure of how well they are doing. For banks things are different.

The assets are promises by others to pay sometimes in the future. You give money to somebody else and you have an asset. The flows of money are more complex. After many years of interviewing in big and small banks we have yet to come across any bank manager who believes that the Cash Flow Statement of a bank according to international standards contains any useful information at all.

There are even strong indications (Torfason, 2014) that banks create money out of thin air. Part of the explanation for this is that banks have different kinds of relations and dependencies on their contexts.

Primitive forms of banking, long before Christ, have been discovered by archaeologists. One example is the Code of Hammurabi from about 1700 BC, which refers to regulation of banking.

The obvious prerequisites for banking are stable economic relations, monetary

economy, record-keeping, and structure. The stability of economic relations is

manifested in the lender having access, e.g., by court, to the borrower to demand

his money back, otherwise trade on credit could not take place. It is also a matter

of money taking a significant part of the payment of goods and services. It is easy to imagine how the emergence of coins (copper or silver and gold) would speed up the rate of transactions since storage of goods from barter activity would be quite cumbersome. Record-keeping is necessary to keep track of a large number of transactions, which are required for a bank to be “professional”. The structures that allow the formation of institutions can be of many kinds, but they have the function in common that they will provide a forum for settling contested claims.

This latter function also provides a basis for regulation. (I will try to add the predominant worldview as a determining factor as to what banking becomes.)

In the old age, like Babylonia around Hammurabi’s time (2000 BC), it was customary to deposit wealth at temples, being the centre around which society organized, for safe keeping. Families engaging in banking activity are recorded from Mesopotamia several hundred years BC. Xenophon is on record (in his

“On Revenue” from the 350s BC) to have suggested banking in something like a joint-stock form.

It seems like banking flourishes when there are many of them around, creating financial centres, like Athens, Corinth and Patras a hundred years BC. Banking in the Roman Empire, however, did not develop much due to the Romans’

preference for cash. Furthermore the dominant religions disliked banking. Jews were not allowed to charge interest for loans to other Jews. Christian churches forbade the charging of interest on loans (ursury), and the same goes for Islam, even trade in promissory notes is forbidden. The key was that you are not allowed to increase your capital with no services provided. Lending your surplus money to someone in need is charitable. Giving it all away will save your soul (Brown, 2015).

1.3. The changing nature of arbitrage

Arbitrage has driven trade (together with greed) since the beginning of time.

The discovery of a discrepancy between the price of something here and the price there entices tradesmen to move the goods from here to there with profit.

Wikipedia knows what arbitrage is:

“In economics and finance, arbitrage (US /ˈɑrbɨtrɑːʒ/, UK /ˈɑrbɨtrɪdʒ/,

UK /ˌɑrbɨtrˈɑːʒ/) is the practice of taking advantage of a price difference

between two or more markets: striking a combination of matching deals

that capitalize upon the imbalance, the profit being the difference between

the market prices. When used by academics, an arbitrage is a transaction

that involves no negative cash flow at any probabilistic or temporal state

and a positive cash flow in at least one state; in simple terms, it is the

possibility of a risk-free profit after transaction costs. For instance, an

arbitrage is present when there is the opportunity to instantaneously buy

low and sell high.” (capiche?)

Michael Lewis (2015) thinks this “instantaneously” has to do with technology.

His first mention of it in “Flash Boys” (p. 65) is when he introduces one of the heroes in his tale of High Frequency Trading, Ronan, who helped banks and others to build faster systems:

“He was struck, over and over again, by how little the traders he helped understood of the technology they were using. ’They’d say. ‘Aha! I saw it – it’s so fast! And I’d say ‘ Look I am happy you like our product. But there’s no fucking way you saw anything.’ And they’re like ‘I saw it!’ And I’m like

‘It’s three milliseconds – it’s fifty times faster than the blink of an eye’

He was also keenly aware that he had only the faintest idea of the reason for this incredible new lust for speed. He heard a lot of loose talk about

“arbitrage,” but what, exactly, was being arbitraged, and why did it need to be done so fast. ‘I felt like a getaway driver’ he said, “Each time it was like ‘Drive faster! Drive faster!’…………The two biggest high-frequency trading firms, Citadel and Getco, were easily the smartest. Some of the prop shops were smart. The big banks, at least for now, were all slow.”

(This was 2007)

The meaning of “arbitrage” has changed from the ingenious invention of transporting gold by way of written promissory notes like the Medicis and other banks did 500 years ago, to the current “lust” for speed. First it was the realization that you could buy cheap in one place and sell dear in another. All you had to do was to find a way to transport the goods safely between A and B. This is the spatial aspect of arbitrage that drives trade. The temporal aspect, which Lewis (2015) illustrates so well, has to do with the ability to do it faster than the others. This is achieved by, e.g., algorithm trading, and builds on fast cables and fast computers. The easiest phenomenon to understand here is “front running”. This trick presupposes the presence of several stock exchanges (or equivalents), some of them in the form of “dark pools” - facilities set up by, e.g., investment banks to allow clients to post financial instruments for sale (or buy) without the transaction being registered, and therefore without effects on prices). “Front running” means to snap up a posted order, find a matching one, and do a transaction before any of the two parties (buyer and seller) has noticed anything. This can only be done if you have equipment with superior speed (and brilliant programmers). This front running, one should note, is completely risk free. We just have to wait for the counter measures to appear. The Lewis (2015) story is about a group of people who set up their own exchange where transactions are slowed down to make front running impossible and thereby ensure fair trading.

The 500 years covered by the history of banks (even if it is uncertain where

to place the beginning) seems to be the history of evolving arbitrage, from the

spatial aspect driving banking’s related trade, to today’s “lust for speed” stressing

the temporal aspects of arbitrage. I will try to illustrate this journey into a spatio- temporal conception of arbitrage by contrasting the dominating world-views of the time with the fate of prominent banks.

1.4. A quick tour of the world views that set the stage for banking

Before I go into the literature on worldviews and biographies of banks with all their details and complexity I feel there is a need for a quick overview indicating what the reader can expect.

It seems like the driving force behind the flourishing of banks in several Italian cities was increased volume of trade over longer distance. In the opposite direction of the flow of goods there is a flow of payment. This payment flow generates a risk, even when buyer and seller trust each other, since it is attractive for robbers and pirates. The invention of “bill of sales” (a piece of paper saying that, e.g., on the presentation of this bill at the Medici office in Florence I will pay X florins) makes payments less accessible to outsiders. Furthermore, if the Medici office should happen to be out of the required cash at the moment a clerk could be sent across the piazza to cash the bill with another house on the good name of Medici. In this way several banks in the proximity could generate a money market. This would typically happen at trading centres where merchants had varying cash balances as ships come and go. The first banks of any substance would be related to trade – merchant banks – built on personal relations and the banker’s good name. The world view supporting this kind of banking was explicated over a very long period by the scholastics (Langholm, 1998).

As long as the early banks kept to financing trade they prospered on the basis of their “good name”.

As capital accumulated bankers became interesting partners to princes – all wars were (and still are?) conducted on credit. This adds a new kind of risk illustrated by the old saying in Ecclesiasticus

(Quoted from Ehrenberg 1928): ”Noli foenerari fortiori te, quod si foeneravis, quasi perditum habe” (Lend not to him who is mightier than thou; or if thou lendest, look upon thy loan as lost). The borrowing prince was a bad credit risk;

if he won his war he would come back for more for the next campaign, if he lost there would be little left for the creditor. This problem bankers usually solved by acquiring the right to certain future money flows, like the income from the copper mines of Tirol for 5 years. In this way the Fugger family, stemming from textile trade, also became miners with interests as far away as Central America (16

century).

2

The Book of Ecclesiasticus, also known as the Wisdom of Sirach is a second century BC writ-

ing by a Jewish scribe named Shimon ben Yeshua ben Eliezer ben Sira who was from the City

of Jerusalem.

But princes die and successors might not honour debts. This started to change from the 30 years’ war, a very complex war as to its origins as well as allegiances. Historians nowadays tend to agree that what supported the ghastly war for so long

was the efforts of many princes to form a proper (pre-modern) State that was efficient enough to collect taxes and customs payment, provide stability, and administrative competence to regulate business in its territory.

Here the catastrophic decline in British wool business due to the success of the new cotton based cloth (Calico) produced a very deep recession played a role.

It needed to be explained. Money was flowing out of the country, not least, it was thought, by the machinations of a merchant conspiracy, and this had to be countered by state regulation (like the Navigation Act) to manage the Balance of Trade. The ideas were developed in a very intensive debate in pamphlets and brochures easily produced in large numbers now that Gutenberg’s printing press came into general use. The first task – if you wanted to apply the general solution of importing raw materials and exporting manufactured goods - the British thought, was to break the Dutch dominance of the seas. This was accomplished in a series of wars over the 17

century as the Dutch were exhausted by their war of liberation with Spain.

The ideas about how important it was to manage the Balance of Trade have been summed under the label “Mercantilism” (Magnusson, 1999). Now the merchant banks had strong incentives to move office to London as “Britannia ruled the waves” and imperial trade was the order of the day, bringing raw material for emerging industries flowed in from the colonies and exporting manufactured goods at better prices. Banks needed not only to have their trading partners in place, but also the partnership and protection of the state. London was the right place to be.

With dominance of the sea free trade was again an attractive conception.

Economists coming before Adam Smith (1776) developed parts of the doctrine, but Smith integrated it most elegantly. Praising the blessings of free trade, free competition and market solutions without the state meddling in the business of merchants and industrialists. The individual’s striving to “improve his lot” by use of his abilities to “truck and barter” would generate a better life for all. Liberalism created a background for the “golden age” of merchant banks (Banks, 1999) that lasted up to the First World War. Baring Bank moved to London. The advantage of location in London improved with the advent of the telegraph (across the Atlantic).

Now it was no longer a central part of the strategy to warehouse goods in Liverpool.

Baring Bank could focus on merchant banking, and the odd loan to governments in a more selective business strategy. There was an overflow of opportunities and less than 100 employees in all. The bank had to be selective and develop its strength.

3

In 1962 citizens of Hessen responded to a survey concerning the most devastating events

for Germany ranking the 30 Years’ War as the worst, before the two World Wars (Ericson

Wolke(Wolke et al, 2006, p.9)

Europe was devastated after the First World War, not least the losing side.

For them it was necessary to invent a new state, after the imperial regime had lost credibility, Preussen as well as Austria. Socialism had gained adherents as laissez- faire liberalism was seen as failing in providing for all citizens. Proletarization was a consequence of un-checked capitalism in the eyes of many. It also set the stage for socialism arguing for a state to serve the people (rather than trade) regulating life in according to the dictum “from everybody according to his ability, to everybody according to his need”.

The struggle between versions of Liberalism (individual freedom) and versions of socialism (distributive justice by state regulation) characterised the first half of the 20

century with a centre of gravitation in Austria trying to build an (German) Austria on the ruins of the lost First World War. Here the modernist view of science grew strong (logical empiricism) and inspired rational constitutionalism (the rule of law). The debate of the proper organization of society was brutally interrupted by different versions of radical nationalist socialist (bolsheviks, national socialists, fascists). Many scholars and intellectuals fled Vienna for England and the USA (like Hayek, Popper, Schumpeter, Drucker, Wittgenstein…) persuading followers like Friedman to continue the struggle for individual freedom in the form of neoliberalism. Banks adapted, supported lobby organisations, and we ended up with de-regulation, drastic reorganization and growth of banks, and a devastating financial crisis (driven by Greed?). This was not what anyone wanted. How could things go so wrong for banks, again and again? How can we understand this? What is the relation between theory/ideology and practices that effect our life? Big question that could not be answered in a mere essay!

Liberals argued that it was the interventionist state (look what had happened before and during the war!) that was to blame. Street demonstrations were common with confrontation between believers. At the same time academic research had spectacular success. Modernism was breaking through. Scientific methods should be used in designing work processes and investment in new industries with new opportunities now that railways were established. America was the land of opportunity, even if the centre of finance was in London. In Vienna the design of a new Austrian state for the German part of the population was on the agenda. Unified Science with a strict mix of logic (analysis) and facts (empiricism) won adherents (logical empiricism) as religion and superstition were to be kept out of the state. All hopes for the future good society were quashed by emerging nationalism with different orientation in Italy, Russia, and Germany, fired on by the global recession and the Second World War

4

The phrase has been attributed to Etienne-Gabriel Morelly (Code of Nature, 1755), but

was popularised by Marx (Critique of the Gotha Program, 1851). (Again we see a reference

to “Natural Law” (rules that can be deduced from the Bible’s “Golden Rule”) in economic-

political debate).

experience. Between the wars arguably the most noticed event (for economists) was the debate between Keynes and Friedman on the role of the state and the priority of unemployment as a target for economic policy. Welfare states would lean towards Keynes, and free marketers toward Friedman.

The centre of the ideological struggle for the primacy of free markets was the Mont Pelerin Society (MPS), a grouping gathered by the Austrian Friedrich von Hayek (1944) in a small Swiss village in 1948 to discuss policy issues for economies in the post war period. Milton Friedman (1962) was a founding member. Membership in MPS is by invitation only and it holds its meetings annually to this day. Hayek and later Friedman came to be the most prominent activists for the freedom of markets. The neoliberal economists never said much about the role of the state (except that it must intervene against those who cheat in defiance of the rules of fair competition), but it is a distinguishing mark of neoliberalism that the state is supposed to serve the interests of the free market for the good of everybody (Mirowski, 2013). This last argument for free markets – that everybody benefits by wealth “seeping down” – has been questioned by Piketty (2014). According to him wealth seems to be “seeping up”. His conclusions have been challenged due to methodological issues. The same fate has happened to Friedman’s seminal work (with Anna Schwartz, 1963) on the relation between inflation/business cycle and money supply, but, in the case of Friedman, the money supply policies he recommended were quietly abandoned by US authorities as the 2008 crisis approached, much depending on the fact that it was increasingly difficult to know what the money supply was. Banks seemed to create money out of thin air (Minsky 1992). Banks certainly have changed their role in society very rapidly after de-regulation in the 1980s and the crisis that followed in 2008, with new demands for regulation as a consequence.

This chapter introduced the idea of ideological influence on banking practices by way of “corporativism” where the centre of gravity of what constitutes good arguments for problem solutions is pushed in the direction of “State”,

“Market” and “Community” by events, and discourse on values. The goodness of arguments and solutions will be influenced by how well they are aligned with the current worldview. I will try to interpret how the period of a particular world view tended to push “the centre of gravity”.

It was argued that banks are different from most other organizations in that money is the input, output as well as the measure of success. This is assumed to mean that they will be quite dependent on their external relations, and, thus, eager to observe and interpret their contexts. They will change with their changing contexts.

It was further assumed that arbitrage, the driver of deal making and trade, has changed over time. From a situation when arbitrage offered itself in space (moving things from a low-price location to a high-price one) it has also come to include time (doing things faster), which brings technology to centre stage.

Finally, a short account of the historical developments under study in this

essay was given in order to provide a foretaste of what will come next.

2. Greed, arbitrage, and decency in action

Now the review of history through the looking glass provided by writers on historical events, worldviews, practices, and conceptions of citizenship begins.

The ambition can only be to hint at patterns that may help us to understand the background to our current bewilderment concerning the finance sector of society. I assume that there will be fractions of earlier practices embedded in our current ones. Like sediments they provide the foundation for our building of better structures to serve human endeavours.

2.1. Greed – the original sin!

For economists greed is equal to our striving to improve our lot and therefore Adam Smith (1776) was right to base his argument for free trade on the effect it has on our activities (truck and barter) towards doing what we are good at and satisfy the rest of our needs in the market. Thereby we all benefit, we find our place in life, and investment is allocated to the most productive projects. Good for us! And the banks serve as intermediaries balancing the deposits of those who have more than they need at the moment, with loans to those who have the best ideas, but lack the funds to realize them. Good for us! So long as the bureaucrats of the State do not regulate by putting their own priorities before our greed it will work too. The State, controlled as it is by vested interests like lobbies, unions, politicians and other do-gooders, cannot take in all the necessary information and do all the calculations to find solutions. Better leave it to the Market, Hayek and Friedman said, because then greed is at its best.

But from the beginning greed was part of Original Sin, and it was assumed

to be bad for your afterlife. Jesus told the rich man that the only way to get to

heaven was to give all his riches to the poor. That rich man must have been

greedy in the first place to amass his wealth. So our conception of greed must

have changed for the better? First it was a deadly sin that would bring you to

Hell on short notice as we learned from the Scholastics. Purgatory was just a way

station that sorted some of the worst sinners out. The rest had a troublesome

road ahead with daemons lurking in the bushes. Saints could help, and the

prayers of others, if you had given generously to the church (earlier it was a

matter of giving directly to the poor, later you could give to the church and the

rest would be taken care of). Lending money against interest (ursury) was very

bad. In this respect the vast cash flow into the Vatican was a problem for the

Pope. He had to engage that money in other business than finance. Mining and

trade could be done in partnership with tradesmen. Financing war against the

heathens (e.g., crusades) was also a worthy cause. The end of Scholasticism came

toward the end of the 16

century as the Salamanca school argued that interest

is in fact a measure of how much the lender had to forego by lending the money to a particular person. In that way the “market” came in to “depersonalize” the fair price, which was previously a negotiated price between individuals. With this

“depersonalization” the sinfulness of finance started to wash off, so much the more as large scale war was conducted on credit. The fortunes of banks shifted and their strategies had to be adapted accordingly.

In trying to understand I will start from the age old conception of greed as a deadly sin, which we will pay for in the afterlife, just as a background for the scholastics, who were in the business of teaching people how to conduct their life in order to secure a safe journey to heaven. They were preoccupied with the moral conduct of the individual, and their influence started to fade (at least as far as business goes) as the scholastics managed to “depersonalize” fair prices and interest on loans and make them “market” phenomena.

It seems like greed was looked upon as an “original sin” from the beginning of commentary about proper conduct. It was after you got rich that you needed direction. It was how you can get to Heaven that became the problem then.

You have to give all your riches to the poor if you accomplish something that is as difficult as getting a camel through the needle’s eye. The after life was the problem and family could help the soul along by prayer and alms. Gifts to the growing Christian church could mobilize the saints to help it along. It is different today!

Today, post crisis, a new sense of greed as sin has emerged. We have just to contemplate our conversations with the “financial advisors” inhabiting our banks or other intermediaries. Those advisors claim to be able to guide us through the jungle of financial products provided that we answer – honestly – a few questions that will give a measure of our “risk appetite”, and based on that the advisors will give us the right advice (and collect their bonus for good salesmanship). In the process we have signed a piece of paper with a number of paragraphs protecting the adviser from any complaint. The system rewards risk-taking by employees who manage other people’s money, but protects them from sharing the loss when gambles turn bad has come a long way. With each crisis regulators, driven on by public uproar, initiate stronger rules (like the Frank-Dodd act of the USA).

But at the same time the financial industry mobilizes lobby forces to slow down implementation. It is a good sign, perhaps, that Goldman Sachs closed down its “high frequency stock market trading” when the practice was exposed (e.g., by Michael Lewis 2014). But it was only after the exposure that Goldman acted, even if it had its governance system.

One of the responses to the critique against big banks that caused the crisis by their reckless risk-taking prior to the crisis, was to produce ethical codes.

Brummer (2015, p. 285) points out that writing such texts is the easiest thing –

they tend to look much like the one constructed by Enron prior to its world

famous demise – living up to it is the difficult part:

“In 2009 the Goldman Sachs code of business conduct and ethics lauded

‘integrity and honesty’ as being ‘at the heart of our business’. The shrewdest business on Wall Street added the caveat that ‘from time to time the firm may waive certain provisions of this code.’ A year later, in 2010, Goldman Sachs was fined $ 550 million by the Securities and Exchange Commission for misleading clients.”

Does it all start with Smith’s (1776) premise of people wanting to “improve their lot” through “truck and barter” – probably not – or does it have ancient origins?

Was it the neoliberal economists like Hayek and Friedman that made religion out of greed as part of their argument for how a proper society should be designed?

Or has it to do with “the ransom of the soul” (Brown, 2015)? It seems the value of greed has changed considerably over time. The current idea of the value of greed – famously promoted (in May 1986) by (later) convicted criminal Ivan Boesky in a speech given at University of California Berkeley Business School:

“Greed is all right, by the way, I want you to know that I think greed is healthy.

You can be greedy and still feel good about yourself.” (This speech inspired the 1987 film “Wall Street”) – has had a short and disastrous life. Mankind (as we understand it) has always looked differently upon the phenomenon: Thomas ab Aquinas (1225-1274) wrote “Greed is a sin against God, just as all mortal sins, in as much as man condemns things eternal for the sake of temporal things.”

Those who repent their sins (their greed) and seek forgiveness will not get away with it easily, however. Dante (in Purgatory) claims that they were bound and laid face down on the ground. It is obvious that the consequences of greed has occupied people’s mind for many centuries. Greed is, according to the Webster’s College Dictionary (2010) “excessive or rapacious desire esp. for wealth and possessions”. We have to start from the beginning.

2.2. An overview of wealth and the afterlife during the first centuries AD (Brown 2015)

It seems like the early Christians saw a distinct link between money/wealth and the afterlife. First there was the dominant idea that martyrs will come instantly into the presence of God. Death and afterlife for the ordinary Christian was of little concern in the 250s AD – and there was not very many of them (Cyprian, the bishop of Carthage, a small congregation wrote early texts at about 250).

Tertullian wrote even earlier that after death the souls of the dead live in limbo

in wait for Resurrection and the Last Judgment. This view of souls in waiting

soon lost currency in Western Christianity. Now the words of Jesus to the Rich

Young Man “If you would be perfect, go, sell what you possess and give to

the poor, and you will have treasure in heaven” came into focus. But that big,

heroic gesture was not always required, small gifts, alms, would do. The hope was that the Creator would reward mercy with mercy. The living can prepare the way to Heaven by alms. By intercessory prayer the living could also smooth the way for their dead loved ones. Almsgiving became a standard part of funerals.

Furthermore, as the catacombs of San Sebastian (south of Rome) show, there were facilities close by the tombs for having a meal – refrigerium – with the dead.

From the third century Christianity gained in importance with the conversion of Constantine (in 312). This meant that, with him, there were rich Christians in the community and the poor came more into focus (while the martyrdom was more or less forgotten as a portal to heaven). With this there was also a sense of difference between souls. Some were on a fast track to Heaven. Augustine (422) introduced doubt again in Enchiridon, written like a handbook for Christian laymen. When faced with the questions about to which extent different rituals

“worked” his answer was “God only knows”, but in trying to sort things out

he would distinguish between the valde boni (altogether good), who could be

assumed to reach heaven with no difficulty, and the valde mali (altogether bad),

who were destined for hell). This left the middle group (non valdes), which

Augustine said could be helped by prayers and offerings provided that they had

qualified by living a reasonably good life. Now the church was taking a dominant

role in Roman society, a church of non valdes. This middle group needed guidance

from the scholastics.

3. Scholasticism –

guiding individuals to proper use of their free will

Langholm (1998) has sifted through the Middle Ages literature where scholars debate the free will of economic actors participating in exchange of goods and services, including loans, and its limitations. He shows how the scholars taught the official doctrine of the Catholic Church by drawing heavily on the heritage of classical antiquity (Aristotle). The topic in focus was the free will. Sin is voluntary, and scholastic advice aimed to fend off the weakening of that will (“akrasia”).

Langholm (1998) introduces his topic by referring to Weber’s (1968/1925) treatment of power in the general sense (“Macht”) and in its particular sense (“Herrschaft”), domination. Domination comes in many forms. Langholm points to two limiting cases in Weber’s development of this topic: Domination by virtue of a constellation of interests (particularly monopoly), and domination by virtue of authority (power to command, duty to obey).

He argues that Weber is such a good introducer to the topic because of his insistence on putting the concepts “free” and “will” in quotation marks. Those concepts are always relative. It is easy to accept the claim that economic actors in effective markets should be “free” and act “voluntarily”, but what does that mean in practical terms? When is the deviation from the norm large enough to render an exchange or a contract invalid?

The free will can be weakened in several aspects. When it is weakened in one

of the parties of a transaction the deal is not fair and thus not valid. Weakness

of the will (Greek: akrasia) is at the very centre since Aristotle. It can be caused

by threat/fear, ignorance, or need. It is inappropriate to exploit somebody’s need

for one’s own advantage. This is the reasoning behind the claim that ursury

(charging interest when lending money) is not permissible. One should not take

advantage of a needy person’s lack of money for essentials of life. When it comes

to threat/fear it is necessary to establish how much intimidation a person should

withstand. The Greek and Roman law set the norm by referring to “a man of

character” (“vir constans”). If it is reasonable that a “man of character” would

not succumb to the actual threat the complaining party has no case. One should

also remember that in those days one was pretty tolerant toward power and

threat. There was a principle that is present again and again in the literature

on business transactions from ancient times up to, possibly, Hobbes, namely

that also “forced will is free will”. This principle stems from Aristotle and his

example of the captain of a ship in storm who throws cargo over board to save

the ship. Was that act voluntary? Yes it was! The example of the captain and the

jettisoned cargo, so much used in the literature, is an illustration of the enormous

influence of Aristotle over a very long period. The purpose with this illustration,

it should be noted, is to show how a compelling force (the storm) combines with

a free will (the captain’s decision to jettison cargo) to form “mixed acts” (where

“forced will is will”). This argument was also used by the early liberal economists to promote the ideology of “laissez faire”.

We should note that only citizens could take their case to court in Rome.

The slaves and other un-free men had no rights – not to speak of women.

Furthermore if the deviation from the just price (on which well informed men of free will could agree as sellers and buyers) is less than 50 percent (plus or minus) there is also no case.

Ignorance also needs to be judged whether it is reasonable as an argument.

The Romans recognized that the parties in a deal may have different negotiating skills (accounted for by the margin of error around the “just price” mentioned above).

We can see in accounts, like Langholm’s (1998), for the ideas of a fair deal that greed was taken more or less for granted. Focus was on the fairness of a deal between two persons and its regulation. The fairness had to do with ethical deliberations of the involved parties, as individuals. Things started to change with the Scholastics, but the discourse on business still was a matter of the sinfulness of unfair deals. The general problem was rather what the greedy person should do when he became rich (give direct to the poor, later via the church, to expiate his sins).

For St. Augustine the free will was the cause of sin, there is simply no way to sin except voluntarily. Again, then, what sins may be forgiven because they are involuntary? Only those caused by ignorance? Forced will is will.

Against the background of Artistotle, Roman law, and St Augustine, the scholastics with their centre in Paris prepared the way for modern economics via mercantilism in their preoccupation with moral instruction of Christians.

The argument against ursury followed several lines:

• The ursurer sells time (time belongs to God)

• The ownership of the money passes to the borrower and any gain from the loan thus belongs to him (taking ursury is therefore robbery).

• Money is consumed in use and therefore has no value separate from its

• Money is sterile, i.e., it is a fungible, and therefore has no value beyond use its substance.

The argument that the borrower pays interest voluntarily is dismissed on the basis that the borrower is under compulsion via his need. The question whether it was also a sin to pay ursury came up also in relation to commercial capital. It seems like most authors argued that if the borrower had no other financing of trade and had no other source of income it was permissible to borrow trade capital against interest.

The scholastic doctrine concerning ursury started to brake down in the 16

century with the argument of the Salamancan scholars, first Molina and later de

Lugo, who argued that what the lender sacrifices by lending the money is what he could have earned by investing it otherwise – i.e., interest is a (opportunity) cost.

The latter (de Lugo) stressed that the most important aspect was that contracts must be kept whatever the terms. Thereby he foreshadowed Thomas Hobbes, the staunch anti-Aristotelian. Dealing with the justice of contracts required an authority that could hear the arguments – a Sovereign arbiter – the state.

Concerning the idea of a just price the scholastics had to fight a drawn-out war against a new approach of the opposition from the late 13

century (Langholm, 1998, Chapter 5 and 6). This new approach stressed ownership (“Anyone is the moderator and arbiter of his own thing” (quoted from Emperor Constantine’s ordinance) combined with the maxim “A thing is worth as much as it can be sold for”. Together these maxims eliminate “morality” from the discussion (and thereby the idea of “just price”) and, at the same time, they legitimize the use of economic power. Henry of Ghent lead the way by arguing that the solution here was to rewrite the maxim’s substituting “can” (be sold for) in stead of “ought to” and others added various general conditions characterizing a fair price like,

”maintained equality between buyer and seller”, “just and reasonable”, “without fraud” etc. But it was still unjust to exploit the “need” of an individual. Gradually the market was introduced as “the common need” (indigentia communis) of those who can exchange with each other. Langholm (1998, p. 86ff) discusses this gradual establishment of the market as the reference point by giving accounts of current controversies concerning the “common estimate” of the market and how it should be understood. The market price in a market that functions normally is uncontroversial, but what about the often overlooked situation when conditions are not normal? Speculation, price discrimination, collusion and monopoly are conditions that are taken up here.

Speculation in foodstuff is generally rejected (albeit the prudent man who gather reserves for emergencies, may sell surplus at the market price), but otherwise various forms of lawful exchange were condoned. The catchword for illegal exchange came to be “inducing dearth”, which was not acceptable. Price discrimination, for instance in the form of charging visitors more than villagers was prohibited in a capitulary by Carloman, King of the West Franks, in 884, and this was subject to scholastic comment. In time there was a distinction between necessities and luxuries. The latter kind was seen to be worth whatever the seller could extort from the buyer (short of fraud and force).

The scholastic literature on monopoly rested on two pillars; the story (in

Politics by Aristotle) about the philosopher Thales, who was expelled from

Syracuse for renting all olive presses from Miletus and Chois to let them out at

a large profit when the season arrived. This was for a while interpreted as the

philosopher wanting to show that philosophers could also become businessmen

if they wanted to, but Albert the Great argued that what Thales did was harmful

to society. That is why monopolies were prohibited by law (Emperor Zeno’s

decree from 483). In time the school of Salamanca modified the ruling on just

price, in the words of Soto, to “A thing is worth as much as it can be sold for in the absence of monopoly, fraud and deceit.”

The consequence of these developments was the reestablishment of the principle that the owner can dispose of his property at will and the primacy of the principle that justice is based on contracts being kept (whatever their content). This meant that the scholastic paradigm was in effect undermined.

Taking the “common estimate” as the measure of a just price meant that the just price had been “depersonalized”. Now the abstract phenomena of supply and demand were in focus rather than the subjective responsibility of persons (as sellers or buyers).

There was, we must remind us, an undercurrent of viewing exchange as something of mutual benefit through the scholastic literature, Scotus goes as far as emphasising that there is an element of mutual gift between the parties. Prices may vary on the basis of what the parties agree to. Still there was the problem of compulsion, exploitation of need, and deceit on both sides that may limit the justice of an exchange. The discussion on the just price and the weakening of the will went on until arguments - similar to the ones Lugo presented later - on ursury emerged with Cajetan’s commentary on Aquinas. Cajetan argued that the dilemma of compulsion can only be resolved by distinguishing between

“causa”, i.e., the motivation that prompts a person to agreement, and “modus”, i.e., the circumstances under which the exchange comes about (auction, through middlemen). A person who offers to sell something must expect to get a lower price than the person who is approached by somebody with an offer. The just price should be based in “modus” rather than in “causa”. This allows for a wider range of variation in prices (It seemingly brings “arbitrage” into play.) Cajetan’s reasoning won support, not least in the Salamanca school. This represents a further step toward “de-personalization” of economic ethics (Langholm, 1998, p.116).

After devoting a chapter to the price of labour (wages), which is generally accepted to be different than the price of goods, because the person seeking employment is at a disadvantage, Langholm arrives at the antithesis of scholasticism in the form of Hobbes’ argument.

Hobbes antithesis

Thomas Hobbes (1588 – 1679) provided the argument for “possessive individualism” even if he did not intend to. There are many interpretations of the Hobbes oevre, among them the Taylor- Warrender thesis (cf Murray, 1997).

The debate on the proper interpretation is still on. Langholm (1998) brings out a reading that ties in with the development of classical economics:

In the pre-societal condition of Nature – everybody’s war against everybody

- the individual is guided by one feeling, fear. In such a situation reason compels

the individual to seek peace. The key then is to keep, always, covenant (contract)

- to build peace by being trustworthy. Justice becomes the keeping of contract

(The individual is bound by contract, only the Sovereign can release him from it). As the “social contract” is established the Sovereign authority (the state) may enact any law it pleases and decide on any quarrel between members. The problem, then, is what is the relation between Natural Law (derived by the individual from The Golden Rule, and reason) and the regulation by Sovereign Law? It is after all the duty of all members to obey the Sovereign Law. When the individual is free to pursue gain by contract, that pursuit will sometimes conflict with Natural Law. Hobbes solves this by distinguishing between Justice (according to Law) and Charity (according to conscience). Charity is the duty to participate in distribution of gain/profit to the poor. But charity cannot, by definition, be regulated by Sovereign Law. It is associated with a function or activity, like almsgiving. It is the virtue by which we share our surpluses. If the Law compels us to give it is no longer charity.

Hobbes thus “stripped justice of all relationship with economic contracts”

(Langholm, 1998, p. 156) and thereby cleared the way for classic economics.

When the market is closed there is only charity.

Summary of Scholasticism and what it means for banking

Scholasticism was preoccupied, as far as economic thought goes, with the

regulation of self-interested exercise of bargaining power. Their theoretical

basis was Natural Law defined by, e.g., Gratian “that which is contained in the

Scriptures and the Gospels, by which anyone is commanded to do to others

what he would have done to himself….” (Langholm, 1998, p. 162). The Natural

Law gives rise to certain rights, which were articulated rather late especially by

members of the Salamanca school, like Francisco Suárez, to mean two different

things: the right to claim (or moral power), e.g., wage for labour, and the right

to property. The idea of property rights points forward to John Locke (1632 –

1704), who, in his Two Treatises of Government (1963) argues that the purpose

of government is to preserve property. Langholm points out that Locke’s

argument is not so much a matter of protecting the weak against the strong but

rather protecting the latter against interference from the government. But this

was in response to Mercantilism, which will be dealt with later on. First consider

what banking would be under the regime of scholasticism:

Figure 3:

Banking under scholasticism is relational. The primary asset is the banker’s good

name. Banking consisted of a set of individual deals. Transactions are always

between individuals, who are under the Devine obligation not to exploit akrasia

by using Threat, Ignorance and Need. The morality of individuals, governed by

their Free Will, was upheld for a very long time as Christianity grew stronger,

and the Church came to take a dominating part (but it also did some lucrative

deals with banks). Risks stemmed from robbery and piracy, but also increasingly

from princes. Medici and Fugger are examples.

4. The most prominent banks – watched by the scholastics

Banks, recognizable to us as such, really came after scholasticism. That is from the 17th century, when Bank of England 1694, Bank of Scotland 1695, and in 1656 “Palmstruchska Banken”, the Bank of Sweden to be, were founded.

Those “central banks” were set up, mainly, to serve the state. Earlier banks were sideshows for merchant families mainly involved in trade. The word ”banks”

referred to the so-called public benches of charitable institutions, which arose in Naples in the 16th century and onwards. Notable here, in Naples, is a pawn shop

”Tour of Mercy” founded in 1539, which claimed to lend without interest and which opened a case of deposits in 1584, recognized by the viceroy of Naples that same year. The ban on ursury was strong and relatively strictly enforced.

You had to be clever, and engaged in trade to earn money from banking.

4.1. Medici

“The rise and decline of the Medici Bank”, by de Roover (1963), is a classic in business history and is focused on and based in archival work. The institutional background (e.g. usury, the money-changers guild, catasto (income return for taxation)), the antecedents to the starting of the bank, the glorious days of Medici under Cosimo’s directorship, and the organization of the bank are described.

This first section is followed by a description of the money market of the times (bills of exchange), the Medici as Merchants (alum and iron), and as industrialists (wool and silk), and as bankers to the Pope. Three chapters are devoted to the different branches throughout Italy and Europe. A final chapter tells the story of the decline of the Medici bank.

Institutional background

From the Crusades to the Great Discoveries Italy was the dominant economic power in the western world. Merchants were the middlemen of spices from the Levant, silk, cloth, wool. Banking prospered with trade since the transfer of payment for goods best was accomplished through bills of exchange (transporting money over land or sea was risky). In bank-dense Florence and some other centres there even was a market for those financial instruments.

The Italians were good at organizing business in partnerships (the Medici bank

was organized as a holding company), they had double entry book-keeping,

and introduced what could be seen as insurance for marine transports. They

developed a body of mercantile law. The Florentine were global businesses

with as many as 90 employees in branches across Europe. The Medici bank is

remarkable because of its good archive; up to 1450 there is an unbroken series of